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In May, Silicon Motion Technology (NASDAQ:SIMO) agreed to be acquired by MaxLinear Inc (NYSE:MXL) in a cash and stock deal that is worth $107.31 per share ($93.54 in cash and 0.388 shares of MaxLinear common stock). However, with shares of Silicon Motion trading at just $67.93, the merger arb spread is a whopping 58% as Wall Street clearly doesn’t see the deal closing. This has Susquehanna analysts spotting an opportunity.
They upgraded shares of Silicon Motion from Neutral to Positive Wednesday and set a $108 price target to reflect the “attractive risk/reward profile.”
While the analysts said they have no insight into the China approval process, the stock stands to capture all of the deal upside should it close.
On the downside, they said it is limited to $57 per share. To get to these numbers the analysts used 3x BV and reflecting trough FWD PE multiple (of 8x) + worst case EPS of $6.62 + $160m breakup fee if MXL were to walk away.
“As such, we argue the shares offer an attractive risk/reward profile; ~$9/share of downside risk vs. the $42/share of upside,” the analysts sum up the opportunity.
